US Economy to Get Slow in Long Term

Yesterday Donald Trump banged the heads of Ford from setting up a new plant at Mexico and threatened to hike taxes for doing business outside its current operating region. Many US companies will have to go through these phases now and it seems that S&P 500 companies revenue and US stock market dream to scale new heights will come down in 2017 if not then in 2018.

Yesterday Donald Trump banged the heads of Ford from setting up a new plant at Mexico and threatened to hike taxes for doing business outside its current operating region. Many US companies will have to go through these phases now and it seems that S&P 500 companies’ revenue and US stock market dream to scale new heights will come down in 2017 if not then in 2018.

The reason is simple since most of the S&P 500 companies revenue come from overseas business and if they are forced to shift their production units back into their own country then in that case it will be a heavy burden on the corporate profits as cost of operation increases. According to data compiled by S&P Dow Jones Indices S&P 500 companies generated 52.2% of their revenue in the U.S. in 2014. That’s down from 53.7% in 2013 and 53.4% in 2012. Hence the remaining 47% of the revenue comes from overseas operation, trade and consumption.

If I go by Dow Jones Industrial Average, using the Fact Set data, shows the U.S. as the source for 55% of revenue; the Americas ex-U.S. as the source for 8% of revenue; Africa and the Middle East the source of 4% of revenue; the Asia-Pacific region the source for 18% of revenue; and Europe the source of 15% of revenue.

The problem is not within the overseas flight of capital or taxation policies. The flaw is within the assets from where a healthy ROCE will be generated. Further the two-thirds of corporations that pay no taxes at all through a combination of “depreciation allowances,” “tax deductions for losses” and other handy methods of sidestepping from US economy. Further their overseas profit capital is not idle, its being deployed in productive financial instruments to balance the returns on investments apart from US based financial instruments.

The point is very clear that Trump could create threatening situations but at the end it will only slow down US economy in the long run. Getting back the capital profit will hardly benefit US economy as US needs to have assets where a ROCE of 10% to 15% is being achieved. Mostly its beyond these levels.

One of the best example for ROCE is that nearly every automaker produces small cars in Mexico to take advantage of lower labor costs. Companies have said it’s difficult to make lower-margin small cars profitably in the U.S. due to higher wages here. Every country enters into free trade and SEZ type segments to reap the gains of economic situation in every country to capitalize its profitability growth. For example take the case of Mexico where U.S. Mexico’s government has courted car companies around the world by entering into 13 free-trade agreements with 44 countries that make up 60 percent of the global gross domestic product. The country has tariff-free access to 47 percent of the worldwide vehicle market, compared with 9 percent for the U.S.

Trump will cut down taxes to get the US market to be lucrative for investments but will that resolve the issue of the currency war affect of doing export into other countries and also what will happen to so many free trade agreements which have been executed over the last 2 decades.

We should be ready to witness that many US companies will face retrospective taxation on profits as well as many transfer pricing issues which will get the US companies under intense problems. Many US companies will be under criminal proceedings as they have violated many laws in different countries and these violations were kept silent as they were holding such high levels of trade and investments in these countries. So now get ready to get blown up.

Indraneel Sen Gupta (neel19414@gmail.com )

Global Macro Economic Researcher and Business Strategist

Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist